by Melissa Klein

As tuition prices climb, more people may turn to financial advisors for help with funding college costs.

Tuition and fees at four-year public institutions in 2003 increased a whopping 14 percent over 2002 levels, according to the College Board. Four-year private institutions saw tuition and fees rise by 6 percent, and at two-year public schools, tuition and fees rose 13.8 percent.

Luckily, clients have lots of funding options, including 529 savings plans, prepaid plans and Coverdell Education Savings Accounts, to name a few.

Advisors also have a new option to consider. In September 2003, a consortium of more than 200 private colleges banded together to create a private college prepaid plan. Similar to state-run plans, the Independent 529 Plan lets people purchase at today’s rates certi­ficates redeemable for a percentage of future tuition at colleges and universities in the consortium. There is a three-year waiting period before the certificates can be redeemed.

“It’s going to be attractive to people who can be pretty sure their child will go to a participating college and who are looking to have a hedge against tuition increases,” according to CPA Joseph Hurley, chief executive of and a partner at Pittsford, N.Y.-based Bonadio & Co.

If the child doesn’t go to a participating school, payments are refunded. However, refunds will be adjusted based on investment performance, with a maximum return of 2 percent per year and a maximum loss of 2 percent. The money may be transferred a family member.

A combination of savings vehicles is often used. “If a client has substantial assets, is concerned about estate planning and maintaining control of the assets, and doesn’t want to go through the expense of setting up trusts 529 plan is the major opportunity,” Hurley said.

From an income tax standpoint, putting money into a child’s name could make sense in some cases, because a child can absorb some income without paying tax. But it could create problems for those who hope to get financial aid. Hurley likes Coverdell accounts, which currently limit contributions to $2,000 a year, for families that plan to send children to a private elementary or high school.

While savings bonds are a popular option, Hurley noted, “It’s a matter of whether the returns will keep up with rising tuition costs — they may not. But there can be tax-free redemptions with EE or I bonds if certain requirements are met.”

Both the number of 529 plans and the amount of assets in the plans continue to grow. Hurley said that assets reached about $30 billion last month, compared with less than $3 billion at the end of 2000.

“We like the fact that clients can put away $55,000 in a 529 at one time,” said Sidney A. Blum, CPA/PFS, CFP, of Leon­etti + Associates, in Buffalo Grove, Ill. Under the gift tax rules, each parent can contribute five years of their $11,000 annual gift exclusion to a 529 savings plan at once.

Cynthia Conger, CPA/PFS, CFP, president of The Arkansas Financial Group, in Little Rock, Ark., also likes 529 savings plans, but takes a different approach to college funding.

“We recommend funding two years of college costs in the child’s name, and the remaining two years in the parents’ name,” said Conger. The reason is that money in a 529 plan must be used for qualified education expenses; otherwise, taxes and pen­alties are applied to with­draw­als.

“If a client has a child planning to go to a $35,000-a-year university, and they are not going for 10 years, and later, the child decides not to go the traditional university route, you’ve got a lot of money sitting there that you have to pay taxes and penalties to take out, unless it can be used for other children,” said Conger. “We’d rather the parent have more control. By funding the last two years in the parents’ name, whatever money isn’t used for education is available for retirement.”

Of course, 529 plans aren’t appropriate for every client. “They’re suitable for people who have time to save and who’ll be cognizant of pulling the money out [without triggering penalties]. And they’re great if you have a lot of kids and they’re all going to go to school,” said Brian Anastasio, CFP, CCPS, of College Funding Consultants in Albuquerque, N.M. But most of his clients only have a two- or three-year horizon for funding college. On top of that, many of them suffered major losses when the market dropped. “They don’t have the money they thought they had, and we have to re­address what they’re doing,” said Anastasio. “For clients who are going to receive need-based aid, the primary vehicles we use are cash-value life insurance and no-load fixed annuities, which have an extremely short or no surrender period, so that when the client needs to access the money, they can.”

While some schools count money in annuities or life insurance as assets available to be spent for college, the majority consider those retirement assets and don’t count them against aid, Anastasio said.

If a client has enough income and assets that she won’t qual­ify for need-based aid, but doesn’t have the cash flow to pay, Anastasio said that he’ll look at an equity refinance. “Then we put the money some place that’s guaranteed, like a money market account or annuity, because we need to know the money is there.”

While investors may like them, prepaid 529 plans have been falling out of favor with some states, as they struggle to afford the tuition payments they’re obligated to make. “It’s a double whammy of tuition at state schools increasing rapidly and investment performance of the program funds not doing well,” Hurley said.

Some states have discontinued their plans, while others have closed them to new enrollments.

Anastasio isn’t a fan of prepaid plans. “When the market is down, they come across like champs,” he said, “but when the market is up, they may just keep up with inflation. And if the kids decide not to go to college and you pull the money out, you get your principle, but little, if any, interest.”

The number of options for college funding is a boon to clients, but it can also be a headache. “These provisions bump into each other and they have to be carefully coordin­ated,” warned Hurley.

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